Consider that, through Friday, April 12, 2024, the S&P 500 Index (SPX) is up roughly 8%.  This comes on the heels of a fantastic 26% year for the SPX in 2023.  And, before the recent upswing started in October, the SPX had essentially been flat, treading water for almost two years (up 1.4% from 9/30/21 to 9/29/23).  So, while the last six months may seem remarkable, it has merely taken us back to longer-term averages after a long consolidation.

No comparisons to the dotcom bubble.

There is a market narrative that suggests valuations are stretched and even irrational.  Given the market leadership and general outperformance of the “Magnificent Seven” over the last 12-18 months, and the excitement surrounding artificial intelligence (“AI”), we continue to hear comparisons to the dotcom bubble.  But 2000 was a very different time, with internet companies without revenues, like, trading based solely upon web traffic and user engagement. 

Today’s tech giants have massive balance sheets, copious cash flows and huge competitive moats.  Nvidia (NVDA) is, perhaps, the poster child for current “excess” trades at a 34.7x Forward P/E while delivering $22.1 billion in revenue in its latest quarter, up from $6.0 billion the year prior.  Its Forward P/E is actually down substantially from 12 months ago (from 58.8x).  For the market as a whole, according to Bloomberg, the Forward P/E for the SPX is 20.9x compared to the 10-year average of 19.4x – on the expensive side of average, but hardly a bubble.

How about the lack of equities? 

Due to very large buyback programs and the recent lack of IPOs, the supply of shares available to purchase has declined dramatically.  According to JP Morgan, the global supply of public equities has already shrunk by $120 billion in 2024, on top of the $40 billion lost in 2023.  At the same time, defined contribution retirement plans (i.e. 401(k)s) continue to generate systematic demand for this reduced supply.  This provides two benefits that buoy equity markets: (1) More buyers competing for fewer shares creates a tailwind for prices; (2) Outside of quiet periods, large buyers that are relatively price inelastic (companies themselves) are often providing “bids” for their own shares through systematic buy programs.

Don’t forget we are in an election year.

 And that’s usually a pretty good thing for markets.  In 83% of the 23 election years since the S&P 500 Index began, the market provided positive returns.  Further, since 1952, the S&P 500 Index has averaged a return of 12.5% in election years when a sitting president is running for reelection.

Planning over prediction.

Financial markets move in all directions fast. The best we can do is avoid prediction, have a deep understanding of what’s making them move, and have a plan as they do. Like Warren Buffet once said, “someone’s sitting in the shade today because someone planted a tree a long time ago.” 

 Are you a Financial Professional? Then check out our new portal and get all kinds of tools and resources on multi-strategy investing, and growth. 


Source: Bloomberg

Validus owns Nvidia (NVDA) in the Destra Multi-Alternative Fund that is sub-advised by Validus. Securities highlighted or discussed in this blog have been selected to illustrate Validus’s investment approach and/or market outlook and are not intended to represent any strategy or portfolio performance or be an indicator for how strategy or portfolio have performed or may perform in the future. Each security discussed in this blog has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and, in aggregate, may only represent a small percentage of a strategy or portfolio holdings. The strategies and portfolios are actively managed, and securities discussed in this blog may or may not be held in such strategies or portfolios at any given time. These individual securities do not represent all the securities purchased, sold, or recommended and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Nothing in this blog shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this letter.

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